Letter to the editor
April 13, 2023 | 5:40 pm
https://www.bworldonline.com/opinion/2023/04/13/516554/letter-to-the-editor-4/
Response to Bienvenido S. Oplas, Jr.’s April 3 ‘My Cup of Liberty’ piece, “Low power supply and Meralco distribution cost”
THE ERC (Energy Regulatory Commission) is a quasi-judicial body and, decisions are made by a group of five commissioners (a chairman and four members). No single commissioner or member can act on his own or set his own pace and, decisions are always made “en banc.” A member can express dissent, but final actions are based on majority decision. In this set up, no investigations or any kind of work can be done on a previous decision or issue by individual commissioners. The work is normally initiated based on third party complaints or a directive from the commission itself (motu proprio). The treatment, however, could be different for regulatory and accounting purposes. Regulatory wise, corrections are done prospectively. For accounting purposes, it will be retroactive if it involves an error.
The issue with Meralco could not have been tackled during my time as Commissioner for the simple reason that the rate reset for Third Regulatory Period (RP) covering 2012 to 2015 was decided by the ERC on June 6, 2011 — a few months before my appointment as Commissioner. My term covered the period August 2012 to July 2018.
The final Maximum Average Price (MAP) for the 3rd Regulatory Period (RP) which should have been the basis for the final distribution rates by customer segment was not done even up to this time because of a Motion for Reconsideration (MR) filed by a consumer group (NASECORE) which was elevated to the Supreme Court. This affected and delayed even the start of the reset for 4th RP (2016 to 2019). As a result, Meralco applied with the ERC to allow it to use an Interim Rate from 2016 until the regular reset process is completed to which ERC agreed. Thus, the use of provisional or interim rates has been going on since 2012 up to the present.
The case was resolved by the SC in October 2019 when I was no longer with the Commission. However, Meralco and ERC both filed an MR which remained unresolved even up to this date.
My retirement in July 2018 gave me the time and opportunity to re-visit the pending Meralco rate reset without any restrictions. My investigation indicated several findings, the more significant of which was an error in the calculation of rates for 2012 to 2015. These findings were included in several reports to ERC, the Senate and House Committees on Energy and, even to the Office of the President. I felt sad, angry, and disappointed because my reports seemed to fall on deaf ears and even the media shied away from the issues except TV Patrol of ABS-CBN which covered the news at least three times during the past two years. Copies of my reports were also furnished to the external auditors of Meralco.
With what I have done on my own time and expense, I do not think that anybody could accuse me of inaction or procrastination. I have done all I can to investigate and made the issues and findings known to people and entities who have the ability to do something about it. All I can do now is follow up and force a decision on the issues. I cannot decide for them. The ball is now in their courts.
Without the coverage by ABS-CBN, I would probably be the only person who would know of the over-billing issue up to this time. Of the over P100 billion I estimated as over-billing, ERC has ordered and Meralco has settled cash refunds totaling P48 billion over the past two years. All consumers have benefitted from this.
ANY FEEDBACK FROM MERALCO?
Meralco executives (particularly Zaldarriaga and Atty. Valles) have always denied that there was over-billing and, that ERC has validated their rates as final. This is a misrepresentation because even the ERC Chairperson herself denied this over the same TV program where the executive appeared. It is clear from the statement by the ERC Chair that the distribution rates from 2012 up to the present were all based on interim or provisional decisions only by ERC and, are subject to adjustment based on the resolution of the MR filed with ERC and the results of the on-going reset process.
The facts are:
1. In its 2022 decision on the 3rd RP, the ERC confirmed that there was an error in the previous decision. However, only a partial adjustment was made resulting in an Order for Meralco to pay a refund of P7.8 billion. After the resolution of the MR with the Supreme Court and, after full adjustment of the error, I expect an additional cash refund to consumers for the period 2012 to 2015.
2. For the period after 2016, ERC also attempted to make corrections which resulted in three refund orders to Meralco totaling P40 billion. Since the basis for the calculation came from the partially adjusted rates from the 3rd RP, ERC has to resolve an MR filed by Intervenors. After resolution, I expect ERC to order Meralco to pay additional refunds to consumers for the period 2016 to the present.
3. In this regard, maybe Meralco should be asked — if they claim there were no over-billings, why did it not oppose any of the above refund orders from ERC? In fact, as of March 2023, Meralco has fully settled all the refund orders totaling P48 billion by way of deduction from monthly bills to consumers.
A FINANCIAL ANALYSIS
Any financial analysis should be done on an apples-to-apples basis to provide meaningful results. Transmission, Distribution and Generation are three distinct operations whose profitability can be affected by many factors not common to all segments. Meralco, as a distribution company, reports the value of power distributed and supplied to them by generators as part of revenues. The same value is reported as the cost of power supplied. Remember that the power supplied by Meralco to consumers is a pass-through cost only — meaning Meralco does not earn any profit from it. Therefore, by including the value of power supplied as part of revenues, this dilutes the relationship of net income to total revenues.
If Meralco’s operations will be viewed in substance as a distribution business (where revenues are earned from allowing consumers the use of its distribution network), the DU income statement would appear as follows:
Meralco executives have consistently denied any overbilling. However, in one of the disclosures to Meralco audited financial statements, the following was stated:
“Meralco recognized provisions for any resulting over-recoveries. The movements in and the balance of the ‘Other noncurrent liabilities’ account in the consolidated statements of financial position substantially represent these provisions…”
This indicates that contrary to declarations by Meralco, it was aware that the use of provisional rates since 2012 could result in over-recoveries. A provision was made instead of an adjustment because the final amount can only be determined from ERC’s final decision on the matter. However, considering that the principal reason was an error, the amount of adjustment should be easily determinable.
For regulatory purposes, Meralco may be justified not to adjust its rates without any final decision by ERC. However, for accounting purposes, the issue is — should the expected amount of over-recoveries be treated as a mere provision, a contingent liability or, immediately adjusted with due consideration to the financial accounting requirements as to whether to treat this as a prospective or prior-period adjustments.
In the meantime, Meralco recognized annual deductions from revenues representing provisions for any claims resulting from over-recoveries and other losses amounting to P10,119 in 2019, P15,526 in 2020, and P10,175 in 2021 (all in Million Pesos). The net cumulative balance of these provisions as reflected in the Noncurrent liabilities section of the balance sheet amounted to P69,971 in 2019, P82,942 in 2020, and P97,981 in 2021 (all in Million Pesos).
Considering that separate liability account was maintained for specific Provisions for Other losses (Note 18), the total amount of possible over-recoveries and claims may be broken down as:
If Meralco maintains its declaration to the public that there was no over-billings or over-recovery, then it should not have recognized any liability or provision for over-recoveries. Then, the amounts reported as net income would change significantly as follows:
In this particular scenario, Meralco would be the most profitable among the several Companies in Mr. Oplas’ article.
ALFREDO J. NON
Consumer and former ERC Commissioner
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